The axioms of expected utility and discounted utility theory have been tested extensively. In contrast, the axioms of social welfare functions have only been tested in a few questionnaire studies involving choices between hypothetical income distributions. In a controlled experiment with 100 subjects placed in the role of social planners, we test five fundamental properties of social welfare functions to determine the efficacy of traditional social choice models in predicting social planner allocations when presented with choice sets designed to test the axioms of the theory. We find that three properties of the standard social welfare functions tested are systematically violated, producing an Allais paradox, a common ratio effect, and a framing effect in social choice. We find support for scale invariance and a preference for tail-increasing transfers. Our experiment also enables us to test a model of salience-based social choice which predicts the systematic deviations and highlights the close relationship between these anomalies and the classical paradoxes for risk and time.

This paper studies how social ties interact with bribery and corruption. In the laboratory, subjects are in triads where two ‘performers’ individually complete an objective real-effort task and an evaluator designates one of them as the winner of a monetary prize. In one treatment dimension, we vary whether performers can bribe the evaluator—where any bribe made is non-refundable, irrespective of the evaluator’s decision. A second treatment dimension varies the induced social ties between the evaluator and the performers. The experimental evidence suggests that both bribes and social ties may corrupt evaluators’ decisions. Bribes decrease the importance of performance in the decision. The effect of social ties is asymmetric. While performers’ bribes vary only little with their ties to the evaluator, evaluators exhibit favoritism based on social ties when bribes are not possible. This ‘social-tie-based’ corruption is, however, replaced by bribe-based corruption when bribes are possible. We argue that these results have concrete consequences for possible anti-corruption policies.

This paper examines how image concerns affect the way giving behavior responds to social information. Subjects in the laboratory decide first whether they wish to donate part of their earnings to a charity, and then, conditional on opting in, decide how much to donate. They receive information on the size of a previous donation either before or after opting in, which allows one to examine the effect of the social information on the extensive and intensive margins of giving separately, and thus distinguish self-image concerns from potential alternative mechanisms. Information on a large previous donation caused subjects to opt out, but when shown only after opt-in, the same information caused subjects to increase donation amounts and did not lead to $0 donations. As further evidence of the influence of image concerns, the reaction to the social information was found to be correlated with a preference for quietly exiting a dictator game, and with scoring high on neuroticism. The results have implications for the inferences we draw about donor motives and welfare based on changes in giving in response to social information.

Public reputation mechanisms are an effective means to limit opportunistic behavior in markets suffering from moral hazard problems. While previous research was mostly concerned with the influence of exogenous feedback mechanisms, this study considers the endogenous emergence of reputation through deliberate information sharing among actors and the role of barriers in hindering information exchange. Using a repeated investment game, we analyze the effects of competition and transfer costs on players’ willingness to share information with each other. While transfer costs are a direct cost of the information exchange, competition costs represent an indirect cost that arises when the transfer of valuable information to competitors comes at the loss of a competitive advantage. We show that barriers to information exchange not only affect the behavior of the senders of information, but also affect the ones about whom the information is shared. While the possibility of sharing information about others significantly improves trust and market efficiency, both competition and direct transfer costs diminish the positive effect by substantially reducing the level of information exchange. Players about whom the information is shared anticipate and react to the changes in the costs by behaving more or less cooperatively. For reputation building, an environment is needed that fosters the sharing of information. Reciprocity is key to understanding information exchange. Even when it is costly, information sharing is used as a way to sanction others.

Central banks are increasingly communicating their economic outlook in an effort to manage the public and financial market participants’ expectations. We provide original causal evidence that the information communicated and the assumptions underlying a central bank’s projection can matter for expectation formation and aggregate stability. Using a between-subject design, we systematically vary the central bank’s projected forecasts in an experimental macroeconomy where subjects are incentivized to forecast the output gap and inflation. Without projections, subjects exhibit a wide range of heuristics, with the modal heuristic involving a significant backward-looking component. Ex-Ante Rational dual projections of the output gap and inflation significantly reduce the number of subjects’ using backward-looking heuristics and nudge expectations in the direction of the rational expectations equilibrium. Ex-Ante Rational interest rate projections are cognitively challenging to employ and have limited effects on the distribution of heuristics. Adaptive dual projections generate unintended inflation volatility by inducing boundedly-rational forecasters to employ the projection and model-consistent forecasters to utilize the projection as a proxy for aggregate expectations. All projections reduce output gap disagreement but increase inflation disagreement. Central bank credibility is significantly diminished when the central bank makes larger forecast errors when communicating a relatively more complex projection. Our findings suggest that inflation-targeting central banks should strategically ignore agents’ irrationalities when constructing their projections and communicate easy-to-process information.

We experimentally compare collusive behaviors in first-price sealed-bid auctions without and with a reserve price. Before the auction begins, a bidder may offer a bribe to the other bidder, in exchange for a commitment not to participate in the auction. We find that the average offer and the rate of successful bribes are significantly lower in the treatment with a reserve price. These results are largely due to responding bidders who demand a greater share of the benefit from collusion. Although imposing a reserve price reduces efficiency, its optimality and bribe deterrence shift the surplus from the bidders to the seller.

We conduct a lab experiment to investigate an important corporate prediction market setting: A manager needs information about the state of a project, which workers have, in order to make a state-dependent decision. Workers can potentially reveal this information by trading in a corporate prediction market. We test two different market designs to determine which provides more information to the manager and leads to better decisions. We also investigate the effect of top-down advice from the market designer to participants on how the prediction market is intended to function. Our results show that the theoretically superior market design performs worse in the lab—in terms of manager decisions—without top-down advice. With advice, manager decisions improve and both market designs perform similarly well, although the theoretically superior market design features less mis-pricing. We provide a behavioral explanation for the failure of the theoretical predictions and discuss implications for corporate prediction markets in the field.

In this study, we conduct a laboratory experiment in which the subjects make choices between real-world lottery tickets typically purchased by lottery customers. In this way, we can reliably offer extremely high potential payoffs, something rarely possible in economic experiments. In a between-subject design, we separately manipulate several features that distinguish the situation faced by the customers in the field and by subjects in typical laboratory experiments. We also have the unique opportunity to compare our data to actual sales data provided by the operator of the lottery. We find the distributions to be highly similar (meaning high external validity for this particular setting). The only manipulation that makes a major difference is that when the probabilities of winning specific amounts are explicitly provided (which is not the case in the field), choices shift towards options with lower maximum possible payoff and lower payoff variance. We also find that subjects generally show preference for long shots and that standard laboratory measures of risk posture fail to explain their behavior in the main task.

Exogeneous disruptions in labor demand have become more frequent in recent times. The COVID-19 pandemic has resulted in millions of workers being repeatedly laid off and rehired according to local public health conditions. This may be bad news for market efficiency. Typical employment relations—which resemble non-enforceable (implicit) contracts—rely on reciprocity (Brown et al. in Econometrica 72:747–780, 2004), and hence could be harmed when workers’ efforts no longer guarantee reemployment in the next period. In this paper we extend the BFF paradigm to include a per-period probability (0%, 10%, 50%) of publicly observable “shutdown”, where a specific firm cannot contract with any workers for several periods. A Perfect Bayesian Equilibrium exists in which these shutdowns destabilize relationships, but do not harm efficiency. Our experiment shows that, remarkably, market efficiency can be maintained even with very frequent stochastic shutdowns. However, the dynamic of relational contracts changes from one where a worker finds stable employment to one where she juggles multiple employers, laying the burden of maintaining productivity upon workers and worsening worker-side inequality.

Differences in cognitive sophistication and effort are at the root of behavioral heterogeneity in economics. To explain this heterogeneity, behavioral models assume that certain choices indicate higher cognitive effort. A fundamental problem with this approach is that observing a choice does not reveal how the choice is made, and hence choice data is insufficient to establish the link between cognitive effort and behavior. We show that deliberation times provide an individually-measurable correlate of cognitive effort. We test a model of heterogeneous cognitive depth, incorporating stylized facts from the psychophysical literature, which makes predictions on the relation between choices, cognitive effort, incentives, and deliberation times. We confirm the predicted relations experimentally in different kinds of games.

We report experimental evidence showing a positive effect of redistribution on economic efficiency via the self-enforcement of property rights, and identify which status groups benefit more and which less. We model an economy in which wealth is produced if players voluntarily comply with the—efficient but inequitable—prevailing social order. We vary exogenously whether redistribution is feasible, and how it is organized. We find that redistribution benefits all status groups as property disputes recede. It is most effective when transfers are not discretionary but instead imposed by some exogenous administration. In the absence of coercive means to enforce property rights, it is the higher status groups, not the lower status groups, who benefit from redistribution being compulsory rather than voluntary.

We present an interactive eye-tracking study that explores the strategic use of gaze. We analyze gaze behavior in an experiment with four simple games. The game can either be a competitive (hide & seek) game in which players want to be unpredictable, or a game of common interest in which players want to be predictable. Gaze is transmitted either in real time to another subject, or it is not transmitted and therefore non-strategic. We find that subjects are able to interpret non-strategic gaze, obtaining substantially higher payoffs than subjects who do not see gaze. If gaze is transmitted in real time, gaze becomes more informative in the common interest games and players predominantly succeed to coordinate on efficient outcomes. In contrast, gaze becomes less informative in the competitive game.

Although volunteers are a critical resource for non-profit organizations, little is known about how best to motivate them to work. A non-profit organization asked episodic volunteers to produce handmade greeting cards to sell at a fundraising event. By running a natural field experiment, we study the effect of motivating these volunteers through (a) the opportunity to vote on how the money that was raised would be spent and (b) the prospect of individual performance feedback. We find an economically and statistically significant positive effect of both tools on the quantity of work done, while the quality is mostly unaffected. Moreover, we observe significant gender differences in responsiveness to the treatments. While the prospect for feedback is more motivating to men, women respond more strongly to the opportunity to decide how the money would be spent. Empowerment seems to be a simple way to increase engagement for people with low enjoyment.

With the rise of experimental research in the social sciences, numerous methods to elicit and classify people’s risk attitudes in the laboratory have evolved. However, evidence suggests that attitudes towards risk may vary considerably when measured with different methods. Based on a within-subject experimental design using four widespread risk preference elicitation tasks, we find that the different methods indeed give rise to considerably varying estimates of individual and aggregate level risk preferences. Conducting simulation exercises to obtain benchmarks for subjects’ behavior, we find that the observed heterogeneity in risk preference estimates across methods is qualitatively similar to the heterogeneity arising from independent random draws from the choice distributions observed in the experiment. Our study, however, provides evidence that subjects are surprisingly well aware of the variation in the riskiness of their choices. We argue that this calls into question the common interpretation of variation in revealed risk preferences as being inconsistent.

Despite public health efforts, uptake of preventive health technologies remains low in many settings. In this paper, we develop a formal model of prevention and test it through a laboratory experiment. In the model, rational agents decide whether to take up health technologies that reduce, but do not eliminate the risk of adverse health events. As long as agents are sufficiently risk averse and priors are diffuse, we show that initial uptake of effective technologies will be limited. Over time, the model predicts that take-up will decline as users with negative experiences revise their effectiveness priors towards zero. In our laboratory experiments, we find initial uptake rates between 65 and 80% for effective technologies with substantial declines over time, consistent with the model’s predictions. We also find evidence of decision-making not consistent with our model: subjects respond most strongly to the most recent health outcomes, and react to negative health outcomes by increasing their willingness to invest in prevention, even when health risks without prevention are known by all subjects. Our findings suggest that high uptake of preventive technologies should only be expected if the risk of adverse health outcomes without prevention is high, or if preventive technologies are so effective that the risk of adverse outcomes is negligible with prevention.

We present a large scale study where a nationally representative sample of 1000 participants were asked to make real purchases within an online supermarket platform. The study captured the effect of price changes, and of the signposting of such changes, for breakfast cereals and soft drinks. We find that such taxes are an effective means of altering food purchasing, with a 20% rate being sufficient to make a significant impact if (and only if) the tax is signposted. Signposting represents a complementary “nudge” policy that could enhance the impact of the tax, though its effectiveness depends on the product category.

We investigate experimentally how granting a manager stock ownership and the opportunity to trade shares of a company’s stock influence the manager’s effort and the overall behavior of the market for the company’s shares. In our design, managerial effort affects the fundamental value of the firm. Our findings suggest that endowing a manager with stock does not significantly increase the manager’s effort. When the manager is allowed to trade the company’s shares, however, she tends to accumulate additional shares, increase her effort, and raise company value. In all of our treatments, prices tend to reflect underlying fundamentals, and bubbles are rare.

In many search environments, searchers are learning about the distribution of offers in the market. I conduct an experiment exploring a broad class of search problems with learning about the distribution of payoffs. My results support the prediction that learning results in declining reservation values, providing evidence that learning may be an explanation for recall. Theory predicts a “one step” reservation value strategy, but many subjects instead choose to set a high reservation value in order to learn about the distribution before adjusting based on their observations. Under-searching in search experiments may stem from a reinforcement heuristic and lack of negative feedback after using sub-optimal strategies.

Experimental double-auction commodity markets are known to exhibit robust convergence to competitive equilibria under stable or cyclical supply and demand conditions, but little is known about their performance in truly random environments. We provide a comprehensive study of double auctions in a stochastic setting where the equilibrium prices, trading volumes and gains from trade are highly variable across periods, and with commodity traders who may buy or sell their goods depending on market conditions and their individual outcomes. We find that performance in this stochastic environment is sensitive to underlying market conditions. Efficiency is higher and convergence to the competitive equilibrium stronger when the potential gains from trade are high and when the equilibrium spans a wide range of quantities, implying a large number of marginal trades. Speculative re-trading is prevalent, especially among those who have little to gain under equilibrium pricing. Those with the largest expected gains typically earn far less than predicted, while those with little or no predicted earnings gain modestly from speculation, leading to some redistribution of gains from high to low expected earners. Excessive trading volumes are associated with negative efficiencies in markets with low gains from trade, but not in the high-gains markets, where zero-sum trading and re-trading appear to enforce efficiency and near-equilibrium pricing. Buyers earn more relative to their competitive equilibrium benchmark than sellers do. Introducing trader specialization leads to fewer trading errors and higher market efficiency, but it does not eliminate zero-sum trading and re-trading.

This paper experimentally investigates the effect of introducing unavailable alternatives and irrelevant information regarding the alternatives on the optimality of decisions in choice problems. We find that the presence of unavailable alternatives and irrelevant information generates suboptimal decisions with the interaction between the two amplifying this effect. Irrelevant information in any dimension increases the time costs of decisions. We also identify a “preference for simplicity” beyond the desire to make optimal decisions or minimize time spent on a decision problem.